How to Calculate Economic Rate of Return

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The economic rate of return, also known as "return on investment" (ROI), is a measurement of the ability of an asset to appreciate in value. Professional investors traditionally use ROI to gauge the efficiency with which a company generates revenue from its assets. By calculating the ROI, it is possible to identify investments that will be attractive in the future because of their ability to produce gains. A negative ROI can also help you identify unprofitable and inefficient institutions.

Calculating the Rate of Return

Determine the cost of investment. If you wish to find the cost of a specific investment a public company has made, it can always be found in the annual report, or 10-K. The 10-K can be found on a public company's website under the "Investors" or "Investor Relations" section. Specific investment costs along with total investment costs will be listed on the income statement.

Determine the current value of the investment. If the company has already sold the investment, the gain will be listed on the income statement. If the company has not sold the investment, gains will be noted as "unrealized." Unrealized gains are gains that would be received if the investment were sold now. When the investment is sold, the gains are "realized."

Calculate the rate of return. The calculation for ROI is as follows: [(Current Value of Investment – Cost of Investment) / (Cost of Investment)] x 100

For example, if an investment cost $5,000,000 and is currently worth $6,000,000, the calculation would be: [($6,000,000 – $5,000,000 / ($5,000,000)] x 100 = 20 percent


About the Author

Steve began writing professionally in 2006, and was published in Financial Markets and Institutions, for his alma mater. He has held positions at wealth management firms, startup companies, a major movie studio, and is CEO of his investment firm. Steve graduated with a Bachelor of Science in business administration from the University of Colorado at Boulder.

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